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Expeditionary Economics, the Milken Institute Review, Second Quarter 30 The Milken Institute Review Expeditionary Economics Make Entrepreneurs, Not War by robert looney The hearts and minds of the citizens of impoverished countries, we’ve been told time and again, can’t be won without filling their bellies. Yet nine years after the U.S. in- vasion of Iraq – and tens of billions in reconstruction aid later – Iraq’s GDP barely exceeds the prewar high. Worse, the economy remains almost wholly dependent on oil, which generates 90 percent of tax revenues and more than 80 percent of export revenues. Now, NATO is rapidly winding down its presence in Af- ghanistan. And the Afghan economy, which is almost to- tally dependent on foreign aid and crumbs from the U.S. military’s table (along with opium), is likely to go into a tailspin as donor countries recoil from Afghanistan’s in- competent governance and failure to contain pervasive Tcorruption. What is the point of spending trillions of dol- lars and hundreds of thousands of lives (American and Af- ghan) to secure a hostile country if the economic mess we leave is as bad as the one we inherited? What, indeed. Hence, the emergence of a new field in economics, dubbed “expeditionary economics” by Carl Schramm, the former head of the Kauffman Foundation. That concept focuses on the development side of the mili- tary equation. The gist is straightforward: economic growth Second Quarter 2013 31 expeditionary economics cent in 2012. Underemployment is harder to is vital for stabilizing post-conflict and post- measure, but is almost certainly much higher. disaster settings, and the U.S. military, often Pretty much all job creation in the formal the dominant player in such environments, economy has been make-work in the public must sharpen its ability to encourage indige- sector. A shadow economy continues to em- nous entrepreneurship. It is Schramm’s con- ploy a large segment – perhaps 40 to 45 per- tention (and mine) that the conventional U.S. cent – of the labor force. As in other countries, approach in recent post-conflict recoveries though, it operates at low productivity be- has failed largely because it has failed to focus cause it has little access to capital and cannot on precisely this objective. enforce contracts through legal means. The expeditionary economics approach is In the initial stages, the U.S. strategy for re- based on a pair of propositions. First, even in pairing the Iraqi economy after the fall of Sad- highly unstable settings, entrepreneurial ac- dam Hussein seemed promising. It was drawn tivity can flourish and provide employment, up along lines similar to the shock-therapy essential goods and financial stability for the transition programs successfully imple- local populations. Second, successful local en- mented in Chile under the Pinochet regime in trepreneurs, particularly those involved in the 1980s and in Poland after the overthrow of new firms, have a vested interest in improved Communism. In devising their strategy, Amer- governance – the rule of law and control of ican planners drew heavily on the conven- corruption. So, once they become established, tional wisdom in vogue in the early 1990s – entrepreneurs will lead efforts to achieve those neoliberalism as embedded in the standard goals. With these processes in play, Schramm Washington Consensus formula (macroeco- argues that sustained economic growth, and nomic stability, fiscal prudence and free mar- thus stability, can be attained in what were kets) – so often prescribed in times of crisis by previously considered impossible situations. the International Monetary Fund. And at least one case study, of the impact of the The cornerstone of the strategy was to cre- coffee industry in post-genocidal Rwanda, ate an independent central bank charged with suggests he’s right. maintaining price stability that would be able to resist pressures to finance big government iraq, the morning after budget deficits. The primary goal (after stabili- Most of the core propositions of expeditionary zation) was to unleash the competitive forces economics can be traced to the U.S. experience suppressed by Saddam, thereby increasing in Iraq. Since the 2003 invasion, Iraq’s econ- productivity. As in post-Soviet settings, though, omy has floundered badly. Despite vast a secondary objective was to make the transi- amounts of assistance along with increasing tion irreversible – here, by destroying state- oil revenues, the country has been plagued by dominated Ba’athist institutions and replacing chronic unemployment – the government them with decentralized, market-oriented claimed joblessness had fallen to “only” 16 per- ones. The Americans were convinced that a Chile- RobeRt Looney is a professor of economics at the naval like, competitive, noninflationary economy Postgraduate School in Monterey, Calif., and the author of would serve as the ideal environment for job a Kauffman Foundation study applying the concept of creation through private-sector innovation expeditionary economics to Pakistan. His views do not necessarily reflect those of U.S. government agencies. and investment. Accordingly, almost all barri- sobhani reuters/omar previous page: 32 The Milken Institute Review ers to international trade were eliminated. (A skills – a dismayingly large group, since public 5 percent across-the-board tariff was allowed, education fell into decay under Saddam – or though largely as a revenue raiser.) And foreign capital for small businesses. The legacy pri- investment was welcomed, both as a means to vate-banking system, which was stuck holding supplement anemic Iraqi savings and to obtain Saddam’s bad debts, was on the verge of col- modern industrial technology. The only levy, lapse. And besides, the banks had little experi- apart from the import tariff, was a Steve ence in commercial lending. As a result, most Forbes-type 15 percent flat tax on consump- Iraqis were left out in the cold, fueling wide- tion. An $18 billion infrastructure program spread anger that was easily mobilized by ex- was focused on lowering private sector pro- tremist sectarian groups. duction costs. Job One for the Iraqi govern- In this violent, politically uncertain envi- ment was to keep out of the way. ronment, it proved impossible to attract the But the strategy was designed without private investment (domestic or foreign) on consulting Iraqis who knew anything about which the whole strategy depended. The result the economic culture. And, of course, Iraqi was a vicious circle of private sector underper- bureaucrats with practical experience in gov- formance and high unemployment – and little ernance – most of whom had lost their jobs hope of change, thanks to widespread, eco- because they’d been members of the Ba’athist nomically disruptive violence. Party – played no role in the early implemen- Note that the strategy was premised on the tation of the program. notion that initial private sector successes The limitations of this strategy quickly be- would empower the winners to push for fur- came apparent. It offered nothing to the large ther economic reforms and improved gover- khalid mohammed/ap/corbis © numbers of Iraqis lacking either marketable nance, so that the growth process would take Second Quarter 2013 33 expeditionary economics pying forces, it might have been sustainable, on a momentum of its own. But there was no and Iraq’s prospects would not have been so Plan B. What’s more, the vacuum created by grim in the wake of the U.S. withdrawal. the government’s pullback from day-to-day economic activity was filled by organized re- can afghanistan be saved? ligious and criminal groups whose interests Back to the conflict in the forefront of current hardly coincided with the commonweal. discussions of expeditionary economics. Over Even after the violence in Iraq was largely the last decade, the influx of military con- suppressed, organized crime abetted by per- tracting and development projects has fueled vasive government corruption (Iraq ranks rapid expansion in the Afghan economy. Al- near the bottom at 175th on Transparency In- though still near the bottom on almost all de- ternational’s 183-country Corruption Percep- velopment indicators, GDP (measured in tion Index, just behind Haiti) stifled entrepre- terms of purchasing power) roughly tripled neurial activity and undermined public trust between 2003 and 2011. in government institutions. Such trust in, This growth, however, does not herald the among other things, the enforceability of con- rise of a viable Afghan economy. The capacity tracts and property rights, is critical to effi- (and maybe the inclination) of the govern- ciency in market systems. Thus today, entre- ment to deliver basic services remains severely preneurship succeeds only at the sectarian limited, and government presence in remote level, where high levels of trust remain. areas is sketchy at best. Illegal activity contin- Advocates of expeditionary economics ues to thrive, further undermining the central have noted the folly of top-down economic government’s tenuous authority and influence. planning in countries with little means of im- Opium-poppy production remains by far the plementing it. The Iraq strategy focused on most dynamic economic activity, generating long-term goals with little regard for the task vast profits that are too often used to finance of getting from here to there – in particular, the Taliban insurgency. the challenge of giving large numbers of peo- Indeed, 10 years after the overthrow of the ple a stake in its success, early in the process. Taliban government, the World Bank esti- Government ministries, excluded from mates that the international military presence planning, were ill-prepared to assume author- and donor contributions account for more ity after the withdrawal of U.S. forces. Many than 97 percent – that’s right, 97 percent – of projects are simply rusting away because the Afghanistan’s legal GDP. Despite attempts to Iraqi bureaucracy has refused to accept respon- promote manufacturing and other industry, sibility for ongoing management and mainte- subsistence farming remains the mainstay of nance costs.
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